Plot alleged over funds in Air Force Probe says scheme hid missiles' cost


WASHINGTON -- The acting Air Force secretary and the hea of the Pentagon's management school could face criminal prosecution for allegedly devising an illegal bookkeeping scheme to cover $112 million in cost overruns in the advanced cruise missile program, Pentagon investigators say.

Michael B. Donley, the acting secretary, and Air Force Col. Claude Bolton, commander of the Defense Systems Management College at Fort Belvoir, Va., knew that money for the production of 250 missiles had run out in 1991. Reluctant to stop missile production and ask Congress for more money, they shifted other funds into the program's overdrawn account without authorization and then replaced old contracts with new ones to conceal what they had done, according to a report by the Pentagon inspector general's office and key documents obtained by The Sun.

As a result, taxpayers are likely to pay an extra $80 million for scrapping the old contracts -- and the Air Force will end up with far fewer missiles than planned.

The advanced cruise missile program is a study in the Pentagon's financial disarray that raises questions about the military's ability to live within its budget and handle taxpayers' money. Top Air Force officials even ignored warnings from the Pentagon's comptroller, consciously making decisions that broke the law, according to investigators and Air Force memos.

Their conduct "shows a total disregard for the most basic laws governing the use of appropriations," said Sen. Charles E. Grassley, an Iowa Republican who has urged the Pentagon to send the case to the U.S. attorney general. "This kind of dishonest behavior is unacceptable and must not be tolerated."

Both Mr. Donley and Colonel Bolton insist they have done nothing wrong. "We stand by our original decisions," Mr. Donley said in a written statement.

The law-breaking alleged by the inspector general's office involves the Antideficiency Act, an obscure but fundamental law that requires federal agencies to stay within congressionally authorized funding limits.

Under the law, federal officials cannot sign contracts or run up expenses in excess of amounts appropriated by Congress. Unauthorized overspending is a felony that carries a maximum penalty of $5,000 and two years in prison.

In the summer of 1991, Mr. Donley, then the Air Force's top financial manager, and Colonel Bolton, who was manager of the missile program, and other unidentified officials found that at least four years of sloppy bookkeeping, accounting errors and bad judgment had caught up with them.

They were eagerly expecting delivery of the first 250 advanced cruise missiles to the nation's nuclear arsenal, but when the money for the state-of-the-art weapons ran out, only 54 missiles were completed. The other 196 lay in pieces on the factory floor.

pTC And the price tag kept climbing because of fuel leaks, wing problems and other engineering defects.

The Air Force originally planned to buy 1,000 advanced cruise missiles, which were designed as radar-evading, nuclear-tipped weapons for B-52H strategic bombers. In a retaliatory nuclear strike, pilots would fire this stealthy "stand-off weapon" without having to fly deep inside enemy airspace.

A division of General Dynamics Corp. in San Diego became the prime contractor, receiving two contracts in 1987 and 1988.

By July 1991, the account used by the Air Force to buy all its missiles, including the advanced cruise missile, was empty.

The inspector general's probe found that the Air Force failed for two years to adjust its books to reflect its commitments to pay at least $112.2 million in cost overruns for the cruise missiles.

There were other omissions. Increased costs of $45.8 million in the Titan IV rocket program were not recorded, and another $69 million in adjustments to the MX Peacekeeper missile, Advanced Medium Range Air-to-Air Missile and other related programs were missing from the books, investigators found.

The Air Force records should have been updated as soon as the costs became known, they said. And they advised the Air Force to learn the simple lesson that big defense projects always exceed original target costs.

Compounding Air Force headaches were other financial problems, including accounting errors and a habit of writing checks without making sure there was money in the account to cover them.

Investigators urged that "a single record be used to account for funds and pay bills."

The Air Force let General Dynamics run up millions in expenses to fix the advanced cruise missiles "but had no money in the bank to pay the bills," said Mr. Grassley, in a Senate floor speech April 30. "The Air Force then devised a crooked procurement scheme to launder the bills in order to conceal a violation of the Antideficiency Act."

Air Force officials appeared to know exactly what was happening, according to two urgent memos that E. Ray Smith of the Air Force special programs office sent to Mr. Donley on Nov. 26, 1991. Claiming that $98.6 million was needed "to cover cost overruns associated with the advanced cruise missile program," Mr. Smith warned that "funding of this magnitude is not presently available."

On March 1, 1992, Mr. Donley told an Air Force financial conference in Melbourne, Fla., about "anti-deficiency violations" in the missile account, according to briefing materials distributed to participants. He told his audience that the Air Force had only $58.6 million to pay $212.5 million in bills from assorted missile programs, and he suggested he knew of another source of money.

By the end of the month, Air Force officials decided to charge the cost overruns to money Congress appropriated in the 1992 budget for 120 new missiles. But Pentagon Comptroller Sean O'Keefe urged Mr. Donley to get a legal opinion before dipping into the current budget to cover unauthorized expenses on old contracts.

Until then, "you should not proceed to charge current year funds as proposed," Mr. O'Keefe said in a March 31 memo.

Instead of issuing a "stop work" order and asking Congress for more money or the authority to transfer funds from other programs, the Air Force took a different tack. They canceled the old contracts with General Dynamics "for convenience" on April 6, 1992, and within the next two days gave the company two new 1992 contracts to pay for the work in progress with $166.2 million from its 1992 appropriations.

The Air Force, which now acknowledges it can afford to buy only 460 missiles before the program ends, told investigators this approach was the "only legal option."

And it asserted that no laws were broken because of its actions.

But the Pentagon inspector general's report described Mr. Donley's decision-making as "fiscally imprudent" and accused the Air Force of acting irresponsibly "to avoid reporting a violation of the Antideficiency Act."

Although Colonel Bolton recently took command of the management college, his promotion to brigadier general has apparently been stalled in the Senate Armed Services Committee at the request of Mr. Grassley.

"The Air Force's handling of the advanced cruise missile 'reprocurement' was dishonest from beginning to end," Mr. Grassley told Sen. Sam Nunn, the Georgia Democrat who chairs the committee, in a written request to put the Bolton promotion on hold pending further investigation.

The inspector general's report has triggered a deeper inquiry into the missile program by the Defense Finance and Accounting Service "to nail down who did what, when, where and why," said a senior defense official familiar with the probe. "You can't really send the Air Force to jail, so you have to fix responsibility."

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